From explorerto producerVictoria Oil & Gas PlcAnnual Report & Accounts 2011
ContentsAbout us 1Chairman’s Statement 2Review of Operations 6Directors’ Biographies 14Senior Management Biographies 15Directors & Other Information 16Directors’ Report 17Statement of Directors’ Responsibilities 21Independent Auditors’ Report 22Consolidated Income Statement 23Consolidated Statement of Comprehensive Income 23Consolidated Balance Sheet 24Company Balance Sheet 25Consolidated Statement of Changes in Equity 26Company Statement of Changes in Equity 27Consolidated Cash Flow Statement 28Company Cash Flow Statement 29Notes to the Consolidated Financial Statements 30Notice of Annual General Meeting 58Notes to the Notice of Annual General Meeting 59Glossary 60Victoria Oil & Gas Plc Annual Report and Accounts 2011
Victoria Oil & Gas Review GovernanceAbout us AccountsVictoria Oil & Gas is an independent oil and gas exploration and development companywith projects in Africa and the FSU. The Company’s assets are the Logbaba gas andcondensate field in Cameroon, where our participating interest increased to 95% in July2011, and 100% of the West Medvezhye oil and gas project in Siberia. Both projects are Other informationoperated by Victoria. The Company’s flagship development asset is Logbaba, expectedto be in production by the end of 2011, located in the eastern suburbs of Douala, theeconomic capital of Cameroon.Our strategy remains to grow organically and via acquisition into a profitable companyby building on cash flow and profits from the Logbaba gas and condensate project,becoming a leading player in new thermal and power projects in Cameroon, developingthe huge resource potential at West Medvezhye and acquiring suitably sized companieswith outstanding reserve and production potential. § Building on cash flow and § Developing the huge resource § Acquiring suitably sized profits from the Logbaba gas and potential at West Medvezhye oil companies with outstanding condensate project by becoming and gas in Russia. reserve and production potential. a leading player in new thermal and power projects in Cameroon.Net Reserves Net ResourcesTotal mmboe (2P/2C1 Reserves) Total mmboe2009 26 2009 1,1222010 37 2010 1,2282011 52 2011 1,5941 Includes reserves of 14.4mmboe classified as C1/C2 under Russian classification standards Victoria Oil & Gas Plc Annual Report and Accounts 2011 1
Chairman’s StatementA watershed yearThis has been a most significant year for Victoria Oil & Gas withconsiderable value added to our assets and extensive work completedat site on our principal projects. At our flagship Logbaba gas andcondensate project in Douala, Cameroon we expect to commenceproduction this year. At West Medvezhye, prospective resources arenow in excess of 1.4 billion barrels of oil equivalent (“boe”),exceeding the previous estimates by approximately 300 million boe,and including increased oil prospectivity to 670 million bbls. Acrossthe Company, we have increased net reserves by 40% to 52 millionboe and net resources by 30% to 1,594 million boe. Shareholders havealways supported these investments and it is now the Company’sresponsibility to return added value to shareholders.Review of the Markets Cameroon less than three years ago and to This is a great deal of work and our staffThe financial markets remained extremely drill and complete two successful wells, and contractors have set to the task ofvolatile throughout the period and fears secure a market for our gas and build a gas completing these project requirements withover economic stability have increased plant and pipeline network to our commitment and enthusiasm. We have anfurther this year. The Eurozone debt crisis, customers, all in a built up area of Douala excellent HSE record with one lost timeglobal cut backs and austerity measures is truly outstanding progress. incident and no serious injury with overhave dominated the headlines with gloomy eighteen thousand man days completed. Industry in Douala is severely constrainedpredictions of economic growth in the The assembly of production trees for the by high energy costs and unreliableWest for the foreseeable future. In wells is now complete. We have two wells delivery. Victoria has a captive market thataddition, civil unrest in the Arab world and completed as producers which are capable is eager to take Logbaba gas because itthe tsunami in Japan have only served to of delivering gas in excess of initial customer provides direct savings on energy costs,increase the volatility in the energy markets. demand estimates. Wire line operations cleaner, more reliable energy and fixed including caliper surveys and productionAccess to capital markets in this economic prices for five years. logs have been completed.climate has been challenging for smaller Logbaba gas is expected to attract newAIM-listed E&P companies. In this A substantial part of the gas pipeline industrial entrants to the region andcontext, I am very pleased that Victoria has network is now complete. The entire encourage capital expansion from existingbeen able to continue exploration and section of pipeline to first customers on the customers with certainty of supply at a lowerdevelopment operations apace, securing Magzi Industrial Estate is anticipated to be cost base. Importantly for Victoria, the termsadditional finance of approximately installed within one month, after which the of our gas sales agreements also mean we are$34 million in the financial period and whole network will be pneumatically tested not exposed to gas price fluctuations.reducing our Group losses by $1.4 million again for leaks as part of theto $4.7 million. Since the award of the Exploitation commissioning process. Gas sales to Magzi Licence signed by President Paul Biya in customers will commence while theLogbaba, Cameroon – April 2011 we have made good progress, remainder of the pipeline network(VOG 95% owned and operated) notwithstanding a particularly rainy wet continues under construction.The Logbaba gas and condensate project season. When the licence was granted, the Our gas sales and marketing team continuein Cameroon is now approaching its initial key downstream elements that remained to to sign up industrial customers, includingproduction phase with first gas sales be completed were: multinational firms, with 13 gas salesanticipated by the end of this year. > re-opening and commissioning of the agreements currently in place. I have everyLogbaba represents a rare opportunity in wells; confidence we can double this figure as weAfrica with ownership and control of a > trenching, jointing, installation and continue with our pipeline networkfully integrated gas supply chain. The commissioning of the gas pipeline expansion beyond Magzi and pass by otherCompany owns and controls its own gas network; customers’ doorsteps. The Companydistribution network, which is currently > installation and commissioning of the anticipates we will have signed in excess ofnearing the end of construction, with process plant; and 40 customers within a couple of years ofmarketing and sales of its share of gas to > installation of pressure reduction and commencing operations and our nextindustrial end users located on our metering stations, steel work and boiler drilling programme will be required indoorstep in Douala, the economic capital conversions on customer premises. order to meet anticipated market demand.of Cameroon. Victoria first entered2 Victoria Oil & Gas Plc Annual Report and Accounts 2011
Chairman’s Statementcontinued Review Approximately 80% of our customers are within a 10km radius of central Douala. GovernanceNet Proved and Probable Reserves Net Prospective Resources Oil & Condensate Gas Total Oil & Condensate Gas Total (mmbbls) (Bcf) (mmboe) (mmbbls) (Bcf) (mmboe)Reserves Prospective ResourcesLogbaba Field 4.0 201.4 37.6 Logbaba Area(2) 19.0 950.0 177.3 AccountsWest Med 103 Discovery(1) 11.8 15.6 14.4 West Med Block(3) 721.5 3,902.3 1,416.6Total Reserves 15.8 217.0 52.0 Total Prospective Resources 740.5 4,852.3 1,593.9(1) Victoria’s West Med Reserves, as approved by the Russian Ministry of Natural (2) Blackwatch estimate (2010). Resources, are classified as C1 and C2 reserves according to Russian convention (3) Mineral estimate (2011). and are broadly comparable to the Society of Petroleum Engineers proved, probable and possible reserves Western classification. Other informationThe existing gross proved and probable brownouts hampering the prospect of During the past twelve months, ourreserves of 212 billion cubic feet at foreign investment and expansion from technical team has commenced conceptualLogbaba are sufficient to satisfy an average existing industries. Once we have screening and appraisal studies to optimiseproduction of 30 million standard cubic demonstrated continuity of supply, this development of our prospective resourcefeet a day for the next 20 years. While represents a very large potential market for base and develop our discovery, Well 103,these production levels provide very the Company. Finally, the government has with an early production scheme to bringattractive economic rates of return, the stated plans to treble the existing grid forward initial cash flows. This work isCompany has more work to do to fully power supply by the year 2020. Victoria is ongoing and I am encouraged thatcharacterise the Logbaba reservoir. With extremely well placed to provide gas to preliminary assessment work on the Wellprospective resources in excess of 1 trillion large thermal power projects currently 103 discovery indicates that we can plancubic feet, the Company has considerable being planned in Douala for generation for first oil sales in 2015.upside if we can develop these resources capacity into the grid. In March 2011, the Company commissionedinto quantifiable reserves. I am confident In summary, the engineering and civils a seismic reprocessing and geologicalthat the market is there to utilise these progress have been satisfactory despite an modelling study to be carried out on Westincremental gas reserves were the exceptional rainy season and I am pleased Med by an independent Russian geoscienceCompany to achieve this. to say that we remain on track to deliver consulting institute, Mineral LLCI should like to highlight to shareholders on our stated targets of first production in (“Mineral”). Further to the previouswhat our gas marketing objectives are over Q4 2011. I am very positive about the assessment carried out by DeGolyer andthe next three to five years. In the short coming year and look forward to updating MacNaughton in 2006, they were askedterm, we are concentrating on customers you on market developments and real to incorporate our new well data, passivewhere there is the opportunity for deliverables as we set about bringing this seismic and gas tomography results withsubstitution of heavy fuel oil and other project to its fruition. our existing conventional 2D seismic.liquid fuels with gas used to generate heat In September this year, we were veryfor industry’s process requirements. At the West Medvezhye, Russia (100% owned) pleased to report that Mineral hassame time, we have initiated discussions Whilst the Logbaba project is understandably estimated West Med prospective resourceswith industrial customers and other large the focus of attention from investors, we to be in excess of 1.4 billion boe,power consumers to use Logbaba gas as have made great strides in Russia this year. exceeding the previous assessment bythe prime source of supply for their West Medvezhye (“West Med”), approximately 300 million boe, andelectrical power requirements through strategically located in the Nenetsk region including increased oil prospectivity toonsite gas generator sets. The Company of Siberia with a licence area covering approximately 670 million barrels of oil.also intends to offer aggregated power 1,224km2, represents an asset with major These results are very encouraging indeed.solutions, without reliance on the grid, to hydrocarbon potential which could propel Our team is continuing to investigate thegroups of customers located in the same the Company onto a new playing field. It results of the Mineral study, together witharea such as the Magzi Industrial Estate, lies just west of the super giant Medvezhye the geochemical and passive seismic results,thereby offering improved efficiencies and field where over 70 trillion cubic feet of and we expect to submit an application toeconomies of scale. dry gas has been produced. VOG’s wholly- the Russian authorities requesting approval owned subsidiary, ZAO SeverGas-Invest,Cameroon is challenged by power of our proposed drilling locations for two holds a 20-year licence to develop the hugeshortages, with frequent blackouts and wells in 2012 very shortly. resource potential. Victoria Oil & Gas Plc Annual Report and Accounts 2011 3
Chairman’s StatementcontinuedCustomers on our doorstepOutlook and Other Projects years. We believe economies of scaleThe traditional sector “packaging” and through organic growth and via selectedstructural approach offered by companies acquisitions where we can demonstrate realis, post the financial crisis, being replaced added value will facilitate greater returns toby companies offering cash flow, superior shareholders.growth potential and diversification of risk. The Company is also assessing a number ofFollowing our recent placing for opportunities in Cameroon where we can£9.5 million in September 2011, the leverage our existing relationships andCompany is now well capitalised for an benefit from our existing infrastructure and Logbaba, Cameroonexciting year ahead with cash flows being capabilities. Cameroon is blessed with an Victoria Oil & Gas has a 95% interest in, and operates,generated from Logbaba and development abundance of natural resources and we are the Logbaba gas and condensate field in Cameroon.plans firming up at West Med. examining asset opportunities outside the Since the discovery of the field in the 1950s, Douala, the city where the field is located, has grown into a traditional exploration and production commercial focal point of the Central African region. AtVictoria now has total recoverable proved sphere where our gas reserves can be a present, Logbaba’s gross proved and probableand probable reserves of 52 million boe reserves are sufficient to satisfy an average of catalyst for other industrial opportunities.and significant potential, with prospective 30mmscf/d for the next twenty years.resources in excess of 1.5 billion boe. I would like to thank all employees, contractors and advisers of the CompanyVictoria constantly reviews opportunities to and my fellow Directors for the excellentincrease the Company’s asset base where progress to which everyone haswe see economic value and synergies with contributed this year. Equally, I would likeour existing assets or technical and to thank all Company shareholders formanagement competencies. We have continuing to support Victoria in thesereviewed a number of targets during the challenging markets. I hope you can beginfinancial period and we have a number of to see the rewards of your confidence veryexisting business development soon.opportunities both at the asset andcorporate level that are currently being Kevin Foo West Medvezhye, Russiaappraised by our management team. The Chairman West Med is a large 1,224km2 area located in theBoard remains committed to building Yamal-Nenetsk region of Siberia, the largest gasVictoria into a medium sized, profitable, producing region in the world and is near Gazprom’sresource focused company within three huge Medvezhye field which has been in production since 1972 and has produced over 70 Tcf of gas.Logbaba milestones• 1950s • 1950-1999 • 2001 • 2005 • 2008 • 2009 • 2010 • 2011Elf drilled 4 wells There was no RSM Production Bramlin Limited, Victoria Oil & Gas Plc In September 2009, In early 2010, The President ofaround Logbaba exploration activity Corporation signs a British company acquired Bramlin drilling started on the successful drilling the Republic ofprospecting for oil, during this period Concession listed on the London Limited. first well, La-105. was completed and Cameroon, S.E.but found gas. As and Total/Elf/Fina Agreement with the Stock Exchange, This was the first well La-105 tested at President Biya, signsthere was no use for relinquished their Government of signed a joint venture onshore exploration 55mmscf/d and La- the Exploitationgas at that time the licence in 1999. Cameroon. No Farm-in Agreement activity since the 106, the second well Licence on thewells were capped. exploration work with RSM for the 1950s. was drilled and tested 29 April 2011. during this period. Logbaba Concession. up to 22mmscf/d. Construction of The operating SNH approved the downstream company in Discovery Report elements of the Cameroon, Rodeo and Field project including Development Ltd Development Plan. processing plant (“RDL”) was In the meantime, the and pipe network incorporated to polyethylene pipes commence. manage the required to transport Logbaba project. the natural gas to First gas to be industry in Douala produced. were delivered ready for installation.4 Victoria Oil & Gas Plc Annual Report and Accounts 2011
Victoria Oil & Gas is signing gas sales agreements with large industrial Reviewcompanies, including multi-national firms, in Douala, Cameroon. Examplecompanies include breweries; textile, dairy and plastics manufacturers;metal foundries; and food processing plants.1 2 Governance Accounts Other information3 4 5 1 Cloth manufacturer with estimated 60% share in Central African Region. 2 Metal ingot leaving the furnace prior to being rolled into steel bars for the construction industry. 3 Brand new 20 tonne dual fuel boiler ready for installation at a brewery. 4 Customer conversion specifications and discussions for dual fuel burner. 5 Loading the furnace with scrap metal at an iron foundry.
Review of OperationsFirst mover advantage –into productionWith commissioning of production facilities and our pipeline tocustomers at the Logbaba gas and condensate field (“Logbaba”)expected by year end in Cameroon and the positive appraisal of morethan 1.4 billion barrels of oil equivalent of prospective resources at ourWest Medvezhye asset in Siberia, Victoria Oil & Gas is emerging as atrue exploration and production company with a balanced assetportfolio and real growth potential.Logbaba, Cameroon La-106 successfully reached a total Logbaba Gas Reserves, 100% Basis (Bcf)Logbaba is located in the city of Douala, measured depth of 10,509 feet in April Category Jul-08 Oct-10onshore Cameroon. The Company 2010. The well was drilled deeper than Logbaba Fieldincreased its participation in Logbaba to planned due to the better than expected Logbaba Proved Reserves (1P) 10 4995% in July 2011 and is operator in the sand quality found in the Lower Logbaba Proved + Probable Reserves (2P) 104 212block. The field was discovered in the sections (Exhibit B). Multiple gas-bearing Proved + Probable + Possible1950s by Elf SEREPCA with four wells sands were encountered between 5,482 Reserves (3P) 202 350that encountered gas and condensate in feet and 10,400 feet, which can be Entire Logbaba Blockmultiple reservoir layers. No gas-water correlated to the wells drilled in the 1950s. Prospective Resources n/a >1,000contacts were detected in any of the sands La-106 flowed at rates of up to 22mmscf/d,encountered. The gas-bearing reservoir (ca. 3,600boepd), at different choke sizessands are of Campanian and Santonian age up to 36/64 inch and wellhead flowingof the Logbaba Formation, outlined in pressures up to 3,078psi. Near Term Markets (IndustrialExhibit A, which primarily comprises shalewith interbedded sand and siltstones. The Company’s reserves and resources Consumers Only – 2P Reserves Scenario) estimates at Logbaba were updated in Projected Gas Sales (mmscf/d)The beginning of the financial period 2010 by Blackwatch Petroleum Serviceswitnessed the completion and testing of 50 Limited (“Blackwatch”), which acts astwo new wells, La-105 and La-106, drilled 45 consultant to the Company. The Provedby the Company at Logbaba. Our first 40 and Probable (2P) gas reserves in thewell, La-105, flowed at rates between 35 Logbaba field are contained in Campanian 3011–56 million standard cubic feet per day and Santonian age sands of the Logbaba 25(“mmscf/d”) of natural gas and Formation. All six of the wells drilled to 20210–1,000 barrels per day of condensate date in Logbaba have encountered 15with flowing wellhead pressures varied significant gas intervals and all of the five 10between 2,750–4,552psi. The tests covered wells that were tested flowed gas to surface 5horizons of the Lower Logbaba formation, 0 (Elf did not test their final well when theywhich had not been tested before, and the 1 year 2-3 4-5 encountered gas while looking for oil). years yearsUpper Logbaba D sands. The UpperLogbaba A through C sands, although There is considerable potential in the On site/near site power generationindicated as the best quality hydrocarbon- remaining areas of the Logbaba Block Substitution of liquid fuels for heatbearing sands encountered in the well logs, which are thought to share the samewere not tested as the wells indicated more geology. This potential has been in partthan sufficient production capacity to meet confirmed by the results of the passiveinitial gas demand. The Upper Logbaba seismic survey which provided the first newA–C sands will be perforated and added to geophysical information to be acquiredthe completion interval when required for over Logbaba since the discovery wasproduction. The gas is sweet with a high made. These survey findings are in linecalorific value and the condensate has an with the geological understanding of theAPI gravity of 47 degrees. Logbaba reservoir sands and correlate well6 Victoria Oil & Gas Plc Annual Report and Accounts 2011
The majority of the pipeline to first customers on the Magzi Industrial Estate Reviewhas been buried and pneumatically tested. With commissioning of productionfacilities and our pipeline anticipated by year end in Cameroon, VOG hasmade real progress this year.A B Governance Accounts Other information A Exhibit A, Generalised Stratigraphic 3 Column of the Douala Basin. B Exhibit B, An example of a good quality Logbaba sand in La-106. 1 400mm pipeline awaiting burial on the approach to the Magzi Estate. 2 Local festival in Douala in 2011. 3 400mm pipe on the Magzi Estate with our first customer, an iron foundry, in the background.1 2 Within three years, VOG will have completed the drilling of two production wells, construction and installation of a gas pipeline network and processing facilities, and secured a market for our gas. 5 2010 4 Site preparation – 2009. 5 Drilling operation – 2010. 6 Production facilities installation – 2011.4 2009 6 2011
Review of Operationscontinued All six of the wells drilled to date in the Logbaba block have encountered significant gas intervals.A major potential hydrocarbonaccumulation 2km north of thecurrent structurewith data from the four old wells and the Specifications for pressure reduction and The case for gasnewly drilled wells, La-105 and La-106. Of metering stations have been prepared for Natural gas is the cleanest of all fossil fuels; reducesparticular interest, the results highlight a more than 20 of our existing and potential emission of greenhouse gases; reduces risk of smog,major potential hydrocarbon accumulation customers and the first units for our Magzi resulting in cleaner and healthier air in urban areas.around 2km from the new wells’ surface customers have been ordered. § Douala is one of Africa’s most important trade centres and is a major hub for Central Africa.location (Exhibit C). This prospect, which In summary, Logbaba has outstanding § In all developed and developing countries, thelies entirely within Victoria’s licence block, potential with a strong reserves base, good availability of gas leads to rapid growth in energyappears to be substantially larger than the consumption and industrial expansion. production potential and a large marketexisting discovery and has not been seen in within a small radius. Logbaba is poised toany previous subsurface studies, due to the Customer Specific Benefits place VOG in the forefront of onshore gaslack of geophysical data. § Energy needs are currently satisfied by high-cost producers in West Africa. fuels such as diesel and fuel oilThe Company has focused its attention in – Almost all fuels imported – supply issues.2011 on surface production facilities West Medvezhye, Russia – Petrol and diesel costs are equivalent to UK.construction and pipeline installation. Civil VOG’s wholly owned subsidiary, ZAO § Circa 30% fuel bill savings.works commenced on site during the final SeverGas-Invest (“SGI”), holds a 20-year § Improved boiler efficiencies and longer lifequarter of 2010 in preparation for the Exploitation Licence for West Medvezhye, through reduction of scaling and soot.equipment installation this year. (“West Med”), covering 1,224km2. West § Reduced maintenance costs and less downtime. Med is located in one of the most prolific § Reduced pumping, storage and heating costs.The Company received official oil and gas producing areas of the worldconfirmation that a Decree, awarding the and is adjacent to Gazprom’s giantExploitation Licence for Logbaba, was Medvezhye field that has already producedsigned by President Paul Biya, of the over 70 trillion cubic feet of gas (Exhibit D).Republic of Cameroon, in April 2011.Further to the award, the wells were The block is located in the Yamal Peninsulaprepared for tie-in and the installation in the Nenets region of Siberia and wasand commissioning of the process plant independently assessed in 2006 bycommenced. Currently, a total of 12 DeGolyer and MacNaughton (“D&M”) tovessels of 15 that make up the process have total prospective resources ofplant have now been positioned on site, approximately 1.1 billion boe. In total,including de-sanders, coolers, separators, D&M identified 25 leads and prospectsheat exchangers, and the condensate and the Company’s first discovery in Weststorage and fire water tank. Med, Well 103, was based on a prospect defined by D&M. The discovery has C1Expro, our gas plant contractor, tests the and C2 reserves, independently assessed,process plant vessels, flow lines and under the Russian classification conventionequipment at their base in Douala and of 14.4 million boe as approved by thedelivers them on skid mounted units as the Russian Ministry of Natural Resources.concrete pads on site are completed. Exprohave also installed and completed a During 2010, the second phase of passivesubstantial amount of the pipework, seismic and gas tomography surveys weremanifolds and control equipment on site. recorded and interpreted throughout the year, identifying direct hydrocarbonTrenching, jointing and installation of the indications in six areas, covering a total ofgas pipeline network are in progress. Of a 79 km2, according to VOG managementtotal pipeline distance of 4.5km to our first and GDR estimates (Exhibit E).customers in Central Douala, 3.0km ofpipeline has been installed, backfilled andsuccessfully pneumatically tested, with afurther 1.2km of pipeline jointed andawaiting installation.8 Victoria Oil & Gas Plc Annual Report and Accounts 2011
Further to the inauguration ceremony held on site in June 2011, site Reviewpreparations commenced for the production facilities. The Company isinstalling two processing trains capable of handling 20mmscf/d. VOGanticipates sales of 8mmscf/d by year end 2012 rising to 44mmscf/d byyear end 2014.1 C Governance Accounts Other information2 1 Backfilling and burial operation of a pipeline on the road to the Magzi Estate. C Exhibit C, Results of the Passive Seismic Survey: Hydrocarbon Resonance Low Frequency Iso-Energy Map – the Iso-Energy map appears to delineate the Logbaba field. Two additional prospects are identified, one in the centre of the concession area and another in the north-east quadrant. 2 Groundwork preparation for the processing facilities with a production separator in the background. 3 Training operation using horizontal drilling apparatus “Ditch Witch” which drills in remote or difficult access areas as an alternative to trenching. 4 Inset – The Ditch Witch pulling back 400mm pipe into the receiving pit after drilling a 100m cross section. 5 Pouring operation for a concrete pile required to support the processing facilities.3 5 4
Review of OperationscontinuedPotential for signiﬁcantmarket growthFurther to these encouraging results, the Conceptual design work has commenced Current West Medvezhye ReservesCompany commissioned a seismic to establish costs and schedules for oil, gas Category mmboe Remarksreprocessing and geological modelling and condensate production facilities and C1 + C2 Reserves 14.4 Based on Russianstudy to be carried out on West Med by an supporting infrastructure. The gathering Classificationsindependent Russian geoscience consulting and distribution network design and C3 Resources 170 Based on Russianinstitute, Mineral LLC (“Mineral”), engineering will be phased with facilities Classificationsincorporating the new data sets with the design, starting with fast track Prospective Resources 1,400 Independentlyexisting conventional 2D seismic. Mineral has development of the Well 103 discovery. Assessed by Mineralprepared structure maps and seismic attributes There exist several routes for themaps (Exhibit F) for all of the prospective commercialisation of West Medformations in the West Med block. hydrocarbons. The neighbouring town ofThese results are being integrated with the Nadym is located 44km away with accessCompany’s passive seismic, gas tomography by all-weather road. The Chircha railroadand geochemical studies to define/rank station is located within the southwestleads and prospects and to further assess the boundary of the licence and the river port103 discovery. The relevant technical details and loading terminal of Old Nadym areare currently under review by the technical located 22km away. In addition, one ofteam within the Company and Blackwatch. Gazprom’s principal gas transmission pipelines in the area runs along the easternOn the basis of their assessment received at border of the licence.the end of August 2011, Mineral hasindependently estimated West Med Initial studies have highlighted that anprospective resources to be in excess of early production scheme of the Well 1031.4 billion boe, exceeding D&M’s previous discovery could involve the sale of smallestimate by approximately 300 million boe, volumes of crude into the local marketand including increased oil prospectivity to with prices of US$60 per barrel achievable.approximately 670 million barrels of oil in This would be followed by full scale oilthe Lower Cretaceous Neocomian- and gas development for export as theAchimov and Jurassic formations. Further export market is well established in thisto the Company’s review and assessment of part of Siberia.Mineral’s report we will submit an The results of our preliminary developmentapplication in November 2011 to the assessment work on the Well 103 discoveryRussian authorities requesting approval of indicate achieving first oil sales in 2015,our proposed drilling locations. subject to further refinement and screening.Studies have commenced on well design Exhibit D, West Med Block Locationand engineering for the next phase of Radwan Hadiappraisal and development drilling planned Chief Operating Officerfor Q4 2012. The Company is in (Radwan Hadi is also a Director ofdiscussions with international and Russian Blackwatch)service companies and has compiled initialbudgetary estimates for the wells and drillpads. Future development wells areplanned to be drilled in clusters of three toten to significantly reduce locationpreparation and access cost. This will havea marked impact on developmenteconomics.10 Victoria Oil & Gas Plc Annual Report and Accounts 2011
Considerable value has been added to our assets in West Med this year. A Reviewseismic re-processing and geological modelling study was carried out betweenMarch to August 2011, resulting in the positive re-appraisal of 1.4 billion barrelsof oil equivalent of prospective resources. The Company is now firming updevelopment plans for an early production scheme for the Well 103 discovery withpreliminary assessment work indicating first achievable oil sales in 2015.E 3 Governance Accounts Other information1 2 FE Exhibit E, West Med Well 103 Discovery mapping by different technologies (qualitative and not to scale) from left to right: Conventional Seismic; Gas Tomography; and Passive Seismic.1 The General Manager of our subsidiary, SGI, the COO of VOG, and the Chief Engineer of SGI preparing to visit the Well 103 location in February 2011.2 A winter road neighbouring our Concession.3 The Company’s contracted drilling rig in West Med.F Exhibit F, Seismic Sections & Attribute Maps illustrating Prospectivity of the Achimov Formation.
Review Governance Accounts Other informationThe Company’s vision is tomaximise the value of the Logbabagas ﬁeld for the beneﬁt of itsshareholders, the State, through theNational Hydrocarbon Corporationof Cameroon (SNH), and thepeople of the Republic ofCameroon.
Directors’ BiographiesKevin Foo MSc, DIC, Dip Met, MIMMM Robert Palmer FCA Philip RandChairman Finance Director Non Executive DirectorKevin Foo has a 40 year career in all Robert Palmer is a Chartered Accountant. Philip Rand has over 35 years of financeaspects of mining, including technical, He combines his role as Finance Director and management experience, of which 25operational and project management and with his position as a senior partner in a years have been in the upstream energyhas run several public companies. He has consultancy-based accountancy practice sector. Philip is a director of both upstreamworked on five continents spending where he specialises in providing financial and oil service companies and is also an15 years in Kazakhstan and Russia and is a advice to small and medium-sized advisor to a number of explorationspecialist in the development of mines in enterprises. He holds a number of companies with operations in Africa.the FSU. He was formerly the Chairman of directorships in private companies. Philip was formerly Chief Executive OfficerBramlin Limited, Eureka Mining Plc and of AIM-quoted Equator ExplorationManaging Director of Celtic Resources Austen Titford ACA Limited and Chief Financial Officer ofHoldings Plc, all AIM-quoted resource Executive Director Burren Energy, Group Treasurer ofcompanies. Austen Titford is a Chartered Accountant Monument Oil and Gas and held senior with more than 20 years’ financial and financial roles at Deminex and LouisianaGrant Manheim commercial experience from working for Land and Exploration. Philip is a Fellow ofDeputy Chairman FTSE 100 and AIM-quoted natural the Association of Corporate Treasurers.Grant Manheim has extensive financial resource companies, including Lonrho,experience in the City of London gained LASMO, BHP Billiton and Celticover 38 years at a top-tier investment bank. Resources Holdings Plc. He has worked onIn addition to his financial experience, he projects in Africa, Iran, Russia and Centralalso has knowledge of the oil and gas Asia and brings a broad mix of financialsector having been the Chairman of the experience, covering both the projectexecutive committee of a company whose development and operational phases.business was investment in, anddevelopment of, oil and gas properties inthe United States.14 Victoria Oil & Gas Plc Annual Report and Accounts 2011
Senior Management Biographies Review GovernanceRadwan Hadi Divine Mofa Eckhard MuellerChief Operating Officer Operations Manager, Cameroon General Manager, RussiaRadwan Hadi is a petroleum/reservoir Divine Mofa has more than 15 years of oil Eckhard Mueller has over 27 years’engineer with over 30 years’ experience in and gas industry experience. A graduate experience in exploration and production,the upstream oil and gas industry. He has from Prairie View A&M University in the including four years as Chief Geologist forworked on a broad range of integrated USA, he has led various engineering KazGerMunay and six years as a seniorprojects including reserves estimation, projects accountable as project manager geologist with Gaz de France. He has been Accountsdevelopment planning and asset valuation. and engineer for the technical, financial responsible for development projections inHadi has worked on numerous projects in and commercial aspects of offshore and Germany, Mongolia, Kazakhstan andthe Middle East, Europe, South East Asia, onshore field exploration and development Russia and has held the position ofand Africa. Specifically in Africa, he has operations. Mofa has held senior positions General Manager, Russia with Victoria forworked on projects in the Cameroon, with J Ray McDermott, Oceaneering and over five years.Equatorial Guinea, Ghana, Mauritania, Alseas.Mali and Ethiopia. Vladimir Andreyev Other information Honoré Daïrou Chief Engineer, RussiaJonathan Scott-Barrett CSR Manager, Cameroon Vladimir Andreyev has over 30 years’ oilManaging Director, Cameroon Honoré Daïrou has over ten years’ oil and and gas industry experience. VladimirJonathan Scott-Barrett is a Chartered gas industry experience as a petroleum graduated from Kuybishev Polytechnic (oilSurveyor with substantial natural resources engineer. Daïrou has graduated with a MSc faculty) as a Mining Engineer. He beganexpertise. He is a former Executive degree in Petroleum Geosciences from the his career as a drilling operator working hisDirector of Celtic Resources Plc and a University of Aberdeen; a MSc Degree in way up to Chief Engineer for a largeformer Chief Executive Officer of the Mining and Petroleum Geology from the Russian drilling organisation. AndreyevLondon AIM-listed mining company University of Yaoundé 1, Cameroon; and a also has over 20 years’ experience asEureka Mining. Scott-Barrett was formerly MPhil in Environmental Management Production Manager for Rosneft, (formerlya non executive director of the $13 billion from the University of Stellenbosch, South YuKos) before joining the Company asconglomerate Hanson Plc. Having Africa. Daïrou has worked on numerous Chief Engineer in 2006.previously held the position of Commercial international exploration, production andDirector in Victoria’s London office, Scott- environmental operations as a consultantBarrett, a fluent French speaker, has taken until joining the Company in 2009.on the Country Manager Position inCameroon since the beginning of 2011. Clovis Kape Sales and Marketing Manager, CameroonMartin Devine Clovis Kape has over 14 years’ oil and gasCommercial Manager, London industry experience. Clovis graduated fromMartin Devine has over 11 years oil and River State Polytechnic (Nigeria) as angas experience including four years electrical engineer and prior to joining theinvestment banking as a Senior Associate Company worked on numerous upstreamwith JP Morgan Chase. He has substantial oil and gas projects including onshore andM&A transactional experience as well as offshore operations in the Congo, Gabon,debt advisory and oil and gas client Angola and, in particular, the Malabocoverage exposure. Devine has also held natural gas project in Equatorial Guineasenior positions with Dana Petroleum Plc and the Chad-Cameroon pipeline project.and El Paso Energy Inc. Kape has worked for the Company for over five years and is currently in charge of sales and marketing for Logbaba. Victoria Oil & Gas Plc Annual Report and Accounts 2011 15
Directors & Other InformationCurrent Directors Auditors Nominated AdviserKevin Foo, Chairman Deloitte & Touche Strand Hanson LimitedGrant Manheim, Deputy Chairman Deloitte & Touche House 26 Mount RowRobert Palmer, Finance Director Earlsfort Terrace LondonAusten Titford, Executive Director Dublin 2 W1K 3SQPhilip Rand, Non Executive Director Ireland BrokersCompany Secretary Bankers Fox-Davies Capital LimitedLeena Nagrecha HSBC plc 1 Tudor Street 60 Queen Victoria Street LondonCompany Number London EC4Y 0AH5139892 EC4N 4TR RegistrarsRegistered Office Solicitors Computershare Investor Services plcVictoria Oil & Gas Plc Kerman & Co LLP The Pavilions1st Floor 200 Strand Bridgwater RoadHatfield House London Bristol52/54 Stamford Street WC2R 1DJ BS99 6ZYLondonSE1 9LX16 Victoria Oil & Gas Plc Annual Report and Accounts 2011
Directors’ Report Review GovernanceThe Directors present their Annual Report and the audited Directors’ Remunerationfinancial statements for the year ended 31 May 2011. An analysis of Directors’ remuneration is given in Note 11 of the financial statements.Principal Activities, Business Review and Future The Company has a discretionary share incentive scheme wherebyDevelopments fully-paid shares can be awarded by the Trustees of the EmployeeThe principal activities of the Group are oil and gas exploration Share Ownership Plan (“ESOP”) as a long-term incentive for theand development in West Africa and the Former Soviet Union. Accounts Directors, senior managers and staff. Under this scheme, the ESOPThe Group’s strategy is to grow organically and via acquisition subscribes for shares up to a limit agreed annually by theinto a profitable company by building on cash flow and profits shareholders. The Trustees of the ESOP subscribed for 48,101,590from the Logbaba gas and condensate project. shares during the year.The Group has an exploration project in Russia and a development A copy of the Service Agreement for each Director is available forproject in Cameroon with first production expected by the end of inspection at the Company’s Registered Office.December 2011. The focus of activities in the year has been the Other informationdevelopment of the Logbaba gas and condensate field in Corporate GovernanceCameroon. The Directors support high standards of corporate governance and are committed to managing the Company in an honest and ethicalThe Group operates through overseas branches and subsidiary manner. The Company is not subject to the UK Corporateundertakings as appropriate to the fiscal environment. Significant Governance Code May 2011, but where practical and appropriatesubsidiary undertakings of the Group are set out in Note 16. for a company of this size and nature, the Company takes accountOperations are funded on a monthly basis from funds held of the recommendations on corporate governance of the Quotedcentrally in the Group and against monthly cash calls by each Companies Alliance and is mindful of proper corporate governance.operation. The Board seeks to ensure that the Company is managed in anA detailed review of the significant developments and operating efficient, effective and entrepreneurial manner for the benefit of allactivities of the Group, as well as the business environment, future shareholders over the longer term.prospects and the main trends and factors that are likely to affectthe future development, performance and position of the Group’s Boardbusiness are contained in the Chairman’s Statement and the The Board of Directors currently comprises of the Chairman,Review of Operations. three Executive Directors (including the Finance Director) and one Non Executive Director. The Chairman, Kevin Foo, isResults and Dividends responsible for the leadership of the Board as well as running theThe consolidated loss for the year after taxation transferred to Company’s business, where he is assisted by other Board membersreserves was $4.7 million (2010: $6.1 million). The Directors do in formulating strategy and delivery once agreed by the Board.not propose that a dividend be paid (2010: Nil). The structure of the Board ensures that no one individual dominates the decision making process. The Directors haveDirectors significant and relevant resource exploration and productionThe following Directors held office at the year end: experience together with finance and corporate development skills. Summary biographies for each Director are set out on page 14. InExecutive Directors the opinion of the Directors, given the current scale of operations,Kevin Foo the present Board and operational management structure haveGrant Manheim been appropriate. As the Company grows in the future, it isRobert Palmer expected that the Board will be strengthened.Austen Titford The Board meets at least six times each year providing effectiveNon Executive Director leadership and overall management of the Group’s affairs. The BoardPhilip Rand approves the Group’s strategy and investment plans and regularly reviews operational and financial performance and risk management matters. A schedule of matters reserved for Board decision is maintained. This includes the approval of the budget and business plan, major capital expenditure, acquisitions and disposals, risk management policies and the approval of the financial statements. Formal agendas, papers and reports are sent to the Directors in a timely manner prior to Board meetings. The Board delegates certain of its responsibilities to the Board committees, listed below, which have clearly defined terms of reference. Victoria Oil & Gas Plc Annual Report and Accounts 2011 17
Directors’ ReportcontinuedAll Directors have access to the advice and services of the Relations with ShareholdersCompany’s solicitors and the Company Secretary, who is The Directors attach great importance to maintaining goodresponsible for ensuring that all Board procedures are followed. relationships with the shareholders. Significant information aboutAny Director may take independent professional advice at the the Company’s activities is included in the Annual Report andCompany’s expense in the furtherance of his duties. Accounts, which is available to all shareholders, and the Interim Report. The Chairman also issues a quarterly letter toOne-third of the Directors retire at each Annual General Meeting shareholders. Market sensitive information is regularly released toof the Company and each may be re-elected. Furthermore, every all shareholders in accordance with Stock Exchange rules for AIM-Director must stand for re-election once every three years. A listed companies. The Group is active in communicating with bothDirector appointed by the Board must also stand for election at its institutional and private shareholders and welcomes queries onthe next shareholders’ meeting. matters relating to shareholders and the activities of the Group.At present, the Board does not consider a nominations committee The Annual General Meeting provides an opportunity for allnecessary. When appropriate, any decision will be taken on a shareholders to communicate with and to question the Board onclearly defined basis by the Board as a whole. any aspect of the Group’s activities. The Company maintains a corporate website where information on the Company is regularlyAudit Committee updated, including Annual and Interim Reports and allThe Audit Committee is chaired by Philip Rand and meets at least announcements.twice a year. It is responsible for ensuring that the financial activitiesof the Group are properly monitored, controlled and reported on. Corporate Social ResponsibilityIt meets the external auditors and reviews reports from them. The The Group is subject to best practice standards and extensiveAudit Committee’s full terms of reference are available on request regulations, which govern, amongst other things, environmentaland include: the review of the annual and interim financial protection. The Group is committed to uphold these standardsstatements and of accounting policies; the review with management and regulations as a minimum and to keep these important mattersof the effectiveness of internal controls; and the review with the under continuous review. When appropriate, adequate action andGroup’s external auditors of the scope and results of their audit. provision is immediately taken to ensure full compliance with theThe Chairman and Deputy Chairman are the other members of the standards expected of an international oil and gas exploration andcommittee and the Finance Director attends the committee development company.meetings by invitation. The Group undertakes Environmental Impact Assessments before each development and uses external consultants to advise onRemuneration Committee appropriate actions and procedures.A Remuneration Committee, which consists of the DeputyChairman, the Non Executive Director and the Finance Director, The Group aims to minimise the use of natural resources, such assets the scale and structure of the Executive Directors’ energy and water and is committed to full reinstatement as part ofremuneration and that of senior management and the basis of their its environmental obligations.service agreements with due regard to the interests of The Group works towards positive and constructive relationshipsshareholders. In determining the remuneration of the Executive with government, neighbours and the public, ensuring fairDirectors and senior management, the committee seeks to ensure treatment of those affected by the Group’s operations.that the Company will be able to attract and retain executives ofthe highest calibre. It will make recommendations to the full In particular, the Group aims to provide employees with a healthyBoard concerning the representations to be made to the ESOP for and safe working environment whilst receiving payment thatthe allocation of incentive shares to employees. No Director enables them to maintain a reasonable lifestyle for themselves andparticipates in discussions or decisions concerning his own their families.remuneration. As part of our work programme, the Group is keen to establishThe Chairman of the committee, Philip Rand, will attend the Community Development Projects, including provision of localAnnual General Meeting and respond to any shareholder questions employment and skills training opportunities.on the committee’s activities. Risks and Uncertainties The Group is subject to a number of potential risks and uncertainties, which could have a material impact on the long-term performance of the Group and could cause actual results to differ materially from expectation. The following risk factors, which are not exhaustive, are particularly relevant to the Group’s activities: Title to Assets Title to oil and gas assets in Russia, Kazakhstan and Cameroon can be complex and may be disputed.18 Victoria Oil & Gas Plc Annual Report and Accounts 2011
Directors’ Reportcontinued Review GovernanceLicence Obligations To manage these price and exchange rate risks the Group hasOperations must be carried out in accordance with the terms of structured its gas sales contracts in Cameroon to be fixed price foreach licence, field development plan, annual work programme and five years denominated in US Dollars.budgets agreed with the relevant ministry for natural resources inthe host-country. Typically, the law provides that fines may be Political Riskimposed and/or operations suspended, amended or terminated if a The Group’s principal assets are currently located in Russia andcontractor fails to comply with its obligations under such Cameroon and therefore, the Group is exposed to country specific risks Accountsagreements or fails to make timely payments of levies and taxes for such as the political, social and economic stability of these countries.the sub-soil use, or provide the required geological information ormeet other host-country requirements. Financial Risk Management Details of the Group’s financial risk management policies are setGeological and Development Risks out in Note 27.Exploration activities are speculative and capital intensive and thereis no guarantee of identifying commercially recoverable reserves. 2011 Performance Other information The Directors regularly monitored risks during the year. TheTax Risk Group fulfilled its licence obligations and successfully raisedThe Group is subject to local and national taxes, which are subject $34.3 million after expenses to fund its developments. The Groupto frequent change. The legislation often lacks clarity and there is also increased its net reserves by 40%. Staff turnover has been lessthe added risk of receiving substantial fines for non compliance. than 5% and our total permanent staff increased by approximately 70%.The Group recruits and retains teams of skilled and experiencedprofessionals with sufficient local knowledge and access to external Key Performance Indicators (“KPI”)advisers to manage these risks. The Group is in the exploration phase of the West Medvezhye project and the development phase of the Logbaba gas andRequirement for Further Funding condensate project, so the relevant KPIs relate to the discoveryThe Group may require additional funding to implement its and development of economic hydrocarbon deposits in Russia andexploration and development plans as well as finance its Cameroon.operational and administrative expenses. There is no guaranteethat future market conditions will permit the raising of the Accordingly, the Directors believe that the relevant KPIs are capitalnecessary funds by way of issue of new equity, long-term loans or expenditure and net cash flow. This information is set out in thefarming out of interests. If unsuccessful, this will significantly affect financial statements together with comparative information for thethe Group’s ability to execute its long-term growth strategy. previous year.The Board regularly reviews its funding requirements and the The relevant non financial KPIs are the level of proven andstatus of the financial markets and seeks external advice when probable reserves and resources. These are derived from reportsnecessary when raising funds. obtained from expert third-party advisers as well as from the Group’s internal calculations.Price of Crude Oil and Gas The capital expenditure is a reflection of the exploration andSubstantially all of the Group’s revenues will come from the sale of development activity of the Group. During the year, additions tooil, gas and condensate. The prices of oil, gas and condensate are intangible assets and property, plant and equipment amounted tovolatile and are influenced by factors beyond the Group’s control. $21.2 million, of which $20.5 million relates to the Logbaba gas andThese factors include the demand for oil and gas, exchange rates condensate development project in Cameroon and $0.7 million to theand political events. Additionally, local legislation may require West Medvezhye exploration project in Russia.production to be sold locally and at a significant discount to worldprices. Net cash inflow from financing activities for the year was $34.3 million compared to $49.4 million for the previous period.Exchange Rate Risk In 2011, the source of cash inflows have been through theWhilst future sales are likely to be denominated in local currencies, issuance of new equity shares.the selling price is set taking into consideration movement in theworld price for oil, gas and condensate which is US Dollardenominated. The Group’s expenses, which are primarily tocontractors on exploration and development, are incurredprincipally in US Dollars but also in Russian Roubles, Sterling,Euros and Central African Franc, which is tied to the Euro. TheGroup’s treasury policy is to conduct and manage its operations inUS Dollars and therefore, it is exposed to fluctuations in therelative values of the US Dollar, Russian Rouble, Sterling andEuro. Victoria Oil & Gas Plc Annual Report and Accounts 2011 19